Core competencies represent an organization's fundamental knowledge and skills in coordinating production and technology, acting as the hidden root system that nourishes and stabilizes a company, enabling sustainable competitive advantage beyond individual products.
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The term core competence gets thrown around a lot,
but it has a specific meaning, one
that's especially important for strategists and companies
with multiple business units or product lines.
CK Prahalad and Gary Hamel, who introduced the concept,
described the diversified corporation as a large tree.
The core products are the trunk and major limbs.
The business units are smaller branches,
and the end products are the leaves.
The core competence is the root system
that provides nourishment and stability.
It's essentially what your organization
knows about coordinating production and technology.
If you only compare end products,
you'll miss the real strength of your company.
To figure that out, start by identifying specific core
competencies, the five or six things
at most that your company does better than anyone else.
These meet three requirements.
First, they provide access to a wide variety of markets.
Consider what Honda knows about engines.
It gives them a distinctive advantage in cars, lawnmowers,
and generators.
Second, core competencies contribute
to the benefits of the product as perceived by the customer.
Clearly Honda's expertise in engines fits the bill here too.
Finally, core competencies are hard for competitors
to imitate.
It's been tough for Honda's competitors
to match their engine design and development skills even
with bigger R&D budgets.
Competencies not only bind existing businesses together.
They also nourish new lines of business.
For instance, when Honda first decided to make cars,
they knew they were capitalizing on what
they'd learned about engines from years
of making motorcycles.
Understanding your competencies can prevent you
from making disastrous outsourcing mistakes.
Chrysler, for example, considered
engines an expensive commodity and outsourced them
to Mitsubishi and Hyundai.
That didn't work out so well for Chrysler.
Knowledge fades if it's not used.
In a world of intense global competition,
understanding core competence helps
you figure out how to create sustainable advantage
that's more than just the sum of your current products.
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